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Sterling/Euro Currency Review April 2013

Sterling rallied against the euro in April, as a triple dip recession was avoided.

Sterling made positive gains against the euro towards the end of last month, entering May on the back of the on-going Cypriot banking crisis, weighing heavily on the euro.

Nevertheless, an apparent resolution to the Cypriot crisis left Sterling trading in a relatively tight, if slightly negative range.

Sterling negativity was a result of doubts surrounding forecasts that the UK would avoid a triple dip recession.

However a sharp reversal of fortune followed as Gross Domestic Production (GDP) figures released on April 25th showed the UK had actually experienced 0.3% economic growth in the first quarter of 2013, meaning a first ever triple dip recession in the UK had been averted.

Sterling’s initial decline saw the rate reach lows of €1.1652 (interbank), before touching a high of €1.1907 (interbank) as a result of the surprisingly positive GDP figures. It caused a Sterling rally which breached three-month highs against the euro, as illustrated by Point C on the graph below as recent gloom for euro buyers appeared to lift.

The increase in the GBP/EUR rate illustrated by Point A came despite deteriorating UK economic data, meaning Sterling gains were once more linked to a negative euro as opposed to any fundamental improvements.

Euro weakness was again caused by division amongst European leaders, after concerns of a potential run on Cypriot banks proved unfounded, combined with ill-judged comments from Jeroen Dijsselbloem, President of the Eurogroup, claiming “the Cyprus deal will serve as a template for future bank restructuring in the eurozone.

Euro negativity was further reinforced as concerns grew about the potential taxation of capital sums held in European banks. However, the euro quickly regained ground as European leaders acted swiftly to minimise the effects of Jeroen Dijsselbloem’s comments, with the German Finance Minister contradicting him by, stating "Cyprus was a special case."

Sterling’s gradual decline leading to Point B on the graph was a result of weak economic data and poor growth forecasts leading the International Monetary Funds (IMF) to warn that Chancellor George Osborne was “playing with fire”, with his austerity programme.

This sentiment was echoed on April 19th when credit rating agency Fitch followed Standard & Poor’s lead in cutting the UK’s revered Triple-A credit rating to “reflect a weaker economic and fiscal outlook”, with Christine Lagarde, head of the International Monetary Fund going on to describe UK growth as “not particularly good.”

Outlook

Numerous factors will determine the direction of GBP/EUR rates with the short-term outlook seemingly improved comparable to recent months. However headwinds remain for Sterling, as illustrated by comments from incoming Bank of England (BOE) governor Mark Carney admitting "UK (is) still a crisis economy."

Despite positive GDP figures, which Chancellor George Osborne hailed as a “sign of a healing economy”, 0.3% growth in Q1 2013 means growth in the UK has flat- lined over the past 18 months.

In addition, figures showing an increase in UK unemployment were given credence by HSBC announcing its intention to cut 3,166 jobs in the UK, causing further concerns about the UK’s economic recovery.

Comments from BoE member McCaferty admitting “Sterling weakness hurts Bank of England inflation credibility”, went some way to dampen what had been growing expectation of a another interest rate cut, providing stability for Sterling going forward.

Meanwhile the euro faces deteriorating fundamentals leading George Soros to claim Germany will be in recession before its September elections. His comments were reinforced by a 17% decline in German car sales in March, destroying the belief that Germany will save the day, and pull Europe out of crisis.

Euro weakness towards the end of April can be largely attributed to growing anticipation of an interest rate cut in the eurozone as European Central Bank (ECB) President Mario Draghi admitted a “new rate cut is always a possibility.”

However indications that European leaders are looking for a shift away from austerity with the European Commission’s President Barroso claiming that "While austerity is fundamentally right it has reached its limits" pointing to the potential for high volatility ahead for the euro as a new path for economic recovery is pursued.

Ben Scott
Foreign Exchange Ltd
www.fcexchange.co.uk


This article was featured in our Newsletter dated 02/05/2013





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